The Norwegian government, which is a key shareholder in both companies, welcomed plans to merge their operations.

"This is the start of a new era," said Norway's Prime Minister Jens Stoltenberg. "The merger is an excellent foundation for meeting the challenges facing the oil and gas industry."

Under the proposed deal, the Norwegian government would hold 67% of shares in the new operator.

Ambition

Statoil and Norsk Hydro's bosses say the merger deal makes sense

In a joint statement, the companies said the merged operator would be "a highly competent and financially strong Norwegian-based energy champion".

"The recommended merger is driven by an ambition to grow in Norway and internationally," the companies said.

"The industry faces an increasingly challenging international landscape. To merge now makes perfect sense."

Carnegie oil analyst John Olaisen described the merger plan as "very positive" for both companies.

Statoil, which is based in Norway's western port of Stavanger, employs more than 25,600 people in 31 countries.

Oslo-based Norsk Hydro employs 33,000 people in 40 countries.

The companies said they hoped to complete the merger during the second half of 2007. Mr Lund is destined to become the chief executive of the new company, while Hydro's chief executive, Eivind Reiten, will become its chairman.